Despite a slowdown in quarterly investment and exit
activity, improvement in June is encouraging
Private equity (PE) deal activity in the second quarter of 2012 dropped to the lowest levels
seen since Q2 2010. PE investments dipped 15% from US$1.96b in Q1 2012 to US$1.66b
Q2 2012.
However, much of the slowdown was largely in May. This may be accountable to adverse
budget proposals announced in March, as June saw a signicant increase in monthly
activity — following the clarication of many of the budget proposals. Interestingly, about
half of the investments by value (46%) during Q2 2012 were made in June. So while the
whole quarter’s topline numbers do not seem encouraging, total investments clearly
improved in June, in part driven by greater big-deal activity.
Exit activity also slowed down in Q2 2012, with a similar dip in May. There were 24 PE
exits in Q2, compared with 33 PE exits in Q1 2012 — a 27% decline. This was driven by the
depreciation of the rupee, a signicantly high number of open-market exits in February
and concerns around budget proposals. But, as with investment activity, there has been an
improvement in the level of exit activity in June 2012.
A number of tax and regulatory announcements beneting PE funds were released
in Q2 2012. These include reduction in the capital gains tax, deferral and proposed
rationalization of General Anti-avoidance Rules (GAAR) and the notication of Alternative
Investment Fund (AIF) regulations.
The PE industry in India is facing interesting times. Tailwinds are pushing the industry
forward in the shape of rupee depreciation (especially benecial for investments), the
Indian Government’s positive attitude toward regulations impacting the PE industry and
continuing interest of global investors (with signicant dry powder). Adversely, there are
headwinds in the form of exit challenges (largely because of rupee depreciation and shallow
capital markets/IPO opportunities), a difcult fund-raising environment and, continuing
(but abating) valuation challenges with promoters.
Overall, the rst two quarters of 2012 carried the hangover of the second half of 2011.
Deal activity for the rest of 2012 is expected to continue to be moderate, with portfolio
exits being a major focus.
Private equity roundup is a quarterly

Figure 1. Trend in PE investments
Figure 2. Type of investors
Sources: VCCEdge, Asian Venture Capital Journal (AVCJ) and Ernst & Young research
Note: deal value considers deals where values have been disclosed, while the deal
volumes consider all the deals announced in respective quarters.
Sources: VCCEdge and Ernst & Young research
Overview
928
1,070
2,617
1,946
2,221
1,646
2,517
3,458
1,924
1,771
1,957
1,664
44
73
86
95
96
94 94
123
108
122
116
101

1006
57
387
12
271
0%
20%
40%
60%
80%
100%
Number of deals Value (US$m)
Global Indian Co-investments
Month Target Investor(s) Value (US$m) Sector
June 2012 Continuum Energy Pte. Ltd. Morgan Stanley Infrastructure Partners 212 Infrastructure
May 2012 Thomas Cook (India) Ltd. Fairbridge Capital 150 Travel and nancial services
June 2012 Future Capital Holdings Ltd. Warburg Pincus India 120 Financial services
April 2012 Quality Care India Ltd. Advent International Corp. 110 Health care
April 2012 Marico Ltd. GIC Special Investments and Baring Private Equity Partners 96 Retail and consumer products
June 2012 Super Religare Laboratories Ltd. Jacob Ballas Capital India and International Financial Corp. 66 Health care
June 2012 Just Dial Sequoia Capital India and SAP Ventures 59 Technology
April 2012 Intas Pharmaceuticals ChrysCapital V LLC 56 Pharmaceuticals
April 2012 TVS Logistics Services Ltd. Kohlberg Kravis Roberts & Co. and Goldman Sachs 51 Logistics
June 2012 Educomp Solutions Ltd. Mount Kellett Capital Management, Proparco SA and International Finance Corporation 50 Education
3
Q2 2012
Transactions
Analysis by deal size
Average deal size holds steady
The average deal size in Q2 2012 did not experience any signicant

22.0
22.5
0
10
20
30
40
50
Average deal size (US$m)
Q2
2012
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4

10.0
10.4
11.1
10.0 10.0
15.0
10.0
9.1
11.2
6.2
0
4
8
12
16
Median deal size (US$m)
43 43
45
43
45
21
13
15
15
7
27
18
15
21
13
16

investments, accounting for 19% of total announced PE deal value.
In the largest deal of the quarter, Morgan Stanley Infrastructure
Partners invested US$212m in a wind energy developer, Continuum
Energy. Other renewable energy producers and equipment
companies such as Shalivahana Green Energy, ReGen Powertech
and Vana Vidyut also raised PE funding during this quarter.
Closely following infrastructure, the health care sector received
US$206m in total PE investment and accounted for 12% of the
total deal value in Q2 2012. The largest share of PE investment into
health care has been for the hospital sector, while other emerging
business sectors such as a chain of diagnostic laboratories and
specialized diagnostic/treatment provider have also attracted PE
investments. The hospital segment, which is capital-intensive and
requires sizable investment, accounted for nine PE deals totaling
US$406m in H1 2012. Other notable businesses that attracted PE
investments in 2012 were Super Religare Laboratories, a diagnostic
business (US$66m by Jacob Ballas Capital and IFC); Forus Health,
manufacturer of health care and medical equipments (US$5m
investment by IDG Ventures & Accel Partners); Bright Lifecare,
an online health store (US$5m); NephroLife Care, specialized
diagnostic/treatment services (US$25m); and Sandor Medicaids,
medical devices and distribution (US$2m).
The retail and consumer products (RCP) sector attracted the
third-highest level of PE investments in Q2 with 18 PE deals totaling
US$192m. Within RCP, the consumer products sector — comprising
fast-moving consumer goods companies and fashion brand
manufacturers — attracted the largest share of PE investments,
with notable investments of US$96m in Marico in Q2 2012 by GIC
Special Investments and Baring Private Equity Partners, as well
as US$134m in Godrej Consumer Products Limited in Q1 2012

Others 61 16
Tota l 1664 101
4
Private equity roundup — India
Target Segment Value (US$m) Investors
Marico Consumer products
and personal care 96
GIC Special Investments
and Baring Private Equity
Partners
Monte Carlo Fashions Garments 31 Samara Capital Partners
Robemall Apparels
(Zovi.com)
Online portal
10
Tiger Global and SAIF
Partners
Free Culture Apparels Online portal
9
Sequoia Capital India
Advisors and ru-Net
Fashionara.com Online portal
8
Helion Advisors and
Lightspeed Venture Partners
Adiga's Restaurant NA New Silk Route Advisors
Figure 7. Select PE deals in RCP
Figure 8. Snapshot on PE activity across sectors
Sources: VCCEdge and Ernst & Young research
Sources: VCCEdge and Ernst & Young research

Figure 11. Funds announced/raised (US$b)
Sources: Factiva, Pregin and Ernst & Young research
Sources: Dow Jones Factiva and Ernst & Young research
Similar to India, fund-raising in other markets including China, Latin
America and the US declined in Q2 2012 from the last quarter.
While India fund-raising nearly halved in Q2 2012, Latin America
witnessed a steep decline of 87%.
Figure 10. Select India-focused PE funds raised during Q2 2012
Funds announced Funds raised
3.0
5.2
7.6
3.7
3.6
1.9
0.5
0.8
1.6
0.8
0.0
2.0
4.0
6.0
8.0
10.0
Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
Funds announced/raised (US$b)
PE-backed IPOs
Weakness in PE-backed IPOs continues
The quarter saw only one PE-backed IPO: SAIF Partners

0
1
2
3
4
Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
PE-backed IPOs
Sources: Dow Jones Factiva, ISI Emerging Markets, company lings and Ernst & Young research
1 “22 companies have called off their IPOs so far in 2012: SMC Global Securities,” Vijay Gurav,
The Economic Times, 4 July 2012, via Dow Jones Factiva, (c) 2012 The Times of India Group
PE exits (excluding IPOs)
Open-market exits dominate PE exit activity
in Q2 2012
There were a total of 23 non-IPO PE exits in Q2 2012, compared
with 30 during Q1 2012. Open-market exits continued to dominate
the exits space. The quarter’s most signicant PE exit was an
open-market sale where ChrysCapital sold stake in Balkrishna
Industries, originally purchased in 2005. Secondary sale exits
were one-third that of open-market exits.
Tax and regulatory update
Both the houses of the Parliament and the President of India
approved the Finance Bill 2012, presented in Q1 2012 by the
Finance Minister. Important changes include deferral of GAAR and
a reduced rate of long-term capital gains tax on the sale of unlisted
securities by nonresidents. Postponement of GAAR rules has
brought temporary relief among investors but with an apprehension
about the ultimate shape and form of GAAR. Another important
development this quarter was the notication of the much-awaited
Alternative Investment Funds Regulations by the Securities and
Exchange Board of India (SEBI) to regulate the fund industry more

where an FII chooses not to take any benet under the tax
treaty and subjects itself to tax in accordance with domestic law
provisions, GAAR provisions may not apply to the FII or to the
FII’s nonresident investors. But if the FII chooses to take such
benet, GAAR provisions would apply to the FII but not to the FII’s
nonresident investors.
Target Company Seller Sector
Secondary exits
Trimax IT Infrastructure & Services Ltd. BanyanTree Growth Capital Technology
Care Hospitals Ashmore Health care
Shalivahana Green Energy Ltd. Axis PE Infrastructure
Lapis Marketing Services Pvt. Ltd. Nexus India Capital II Retail & consumer
products
Strategic exits
Primex Healthcare and Research
Pvt. Ltd.
Kalpathi Investments Pvt. Ltd. Health care
Chakpak Media Pvt. Ltd. Accel India Venture Fund,
Canaan Advisors Pvt. Ltd.
Media & entertainment
Atyati Technologies Pvt. Ltd. Ventureast Proactive Fund Technology
Radiant Hospitality Services Lighthouse fund Professional services
Moser Baer India Ltd. Warburg Pincus Technology
Gingersoft Media Pvt. Ltd IndoUS Venture Partners I LLC,
Draper Fisher Jurvetson India
Media & entertainment
6
Private equity roundup — India
Figure 14. List of Strategic & Secondary exits (Q2 2012)
Figure 13. Number of non-IPO exits by type

Strategic sale
Open market
Sources: VCCEdge and Ernst & Young research
Sources: VCCEdge and Ernst & Young research
• Apart from some exceptional cases, where a specic anti-
avoidance rule has been introduced, GAAR will not be invoked.
• To explain certain terms relevant to invoke GAAR like “misuse or
abuse,” “bona de purpose,” “lacks commercial substance,” the
report provides 21 illustrations on applicability of GAAR
(2012-TII-15-ARA-INTL).
While the report provides some clarity on GAAR applicability,
greater clarity is needed on many other fronts. With this in mind,
the Prime Minister has set up an Expert Committee that will
receive public comment on the draft GAAR Guidelines by the
end of July 2012, rework the guidelines based on the feedback
and release a second draft by 31 August 2012, to nalize by
30 September 2012.
Authorities for Advance Rulings (AAR) treat buyback of
shares as tax avoidance scheme taxable as dividend under
Mauritius Double Taxation Avoidance Agreement (DTAA)
In an increasing trend, Indian tax authorities are applying the
substance-over-form doctrine to transactions. One example is
a recent ruling on the issue of taxability of buyback of shares
of an Indian company. The brief facts of the case were that the
shareholders of the Indian company were three foreign companies
incorporated in the United States, Mauritius and Singapore
each along with residuary public shareholders. The Indian company
made an offer for the buyback of shares, and only Mauritius
company accepted the offer.
The AAR observed that the Indian company has not distributed

The AAR observed that the payments made by I Co2 to the
applicant company were not on account of purchase of the CCDs
but were, in effect, payment of interest on the CCDs, taxable, as
interest, in the hands of the applicant, under the ITA as well as the
India Mauritius DTAA.
Apart from the above, there are various other instances where the
tax authorities have attempted to look through a transaction at its
substance.
Central Board of Direct Taxes (CBDT) clarication on
applicability of retrospective amendments to completed
assessments
The retrospective amendments in the Finance Act, including
those to retrospectively tax indirect transfers, have raised
concerns in the investor community on the reopening of old cases.
On 29 May 2012, the CBDT issued a clarication regarding the
reopening of completed assessments. The CBDT has now directed
all its tax authorities not to reopen tax assessments:
• In cases where tax assessment proceedings were completed prior
to 1 April 2012 and for which no notice of reassessment has
already been issued prior to that date
• Where the assessment or any other order that stands validated
because the amendments would be enforced (i.e., irrespective
of any court judgment/order; if a notice has been sent to the
taxpayer; or tax has been levied, demanded or assessed) in
connection with income arising on indirect transfers, such notice
or levy/demand/assessment shall be deemed to be valid.
This CBDT clarication accords protection to cases where an
assessment order has been nalized before 1 April 2012. However,
the CBDT clarication is unlikely to protect cases where nalized
assessment orders are pending adjudication before a judicial

Regulatory updates
Alternative Investment Funds Regulations, 2012
The Securities and Exchange Board of India (SEBI) released the SEBI
(Alternative Investment Funds) Regulations, 2011 (AIF Regulations)
on 21 May 2012. AIFs means a fund which invests private capital
pooled by investors in accordance with a dened policy to benet
its investors. This would include private pools of capital such as
PE funds, hedge funds and venture capital funds (VCFs). The AIF
Regulations will affect only AIFs set up in India, not offshore funds
investing in India through foreign direct investment (FDI). The AIF
Regulations have segregated Funds under the following three broad
categories:
Category I AIF — funds that invest in either start-up, early-stage
ventures, social ventures, SMEs, infrastructure or other sectors that
the government or regulators consider as socially or economically
desirable. This category includes VCFs, SME funds, social venture
funds (SVFs), infrastructure funds and such other AIFs as may be
specied.
Category II AIF — funds that do not fall in Category I and III AIF and
that do not undertake leverage or borrowing other than to meet the
permitted day-to-day operational requirements and would include
PE funds and debt funds.
Category III AIF — funds that employ diverse or complex trading
strategies and may employ leverage including through investment
in listed or unlisted derivatives and would include hedge funds.
The SEBI (Venture Capital Funds) Regulations, 1996 (VCF
Regulations), have been repealed and are subsumed in the
AIF Regulations. The VCF Regulations shall continue to regulate
existing VCFs until the existing fund or scheme managed by
the fund is wound up. Such VCFs may seek reregistration

Government of India released the FDI Circular 1 of 2012 early
in this quarter. One of the key features of the FDI Circular issued
in April relaxes FDI norms for commodity exchanges. There was
a composite (FDI — 26% and FII — 23%) cap of 49% in commodity
exchange under the approval route. The FII limit of 23% has been
liberalized and brought under the automatic route.
Tax and regulatory update ( continued)
8
Private equity roundup — India
Considering that FDI policy has been substantially rationalized
and liberalized, the Government of India has decided that there
is no need for the usual biannual amendments to the circular as
any changes made in the FDI policy are updated through Press
Notes during the year. Therefore, a new circular consolidating
all further amendments to the FDI policy shall be issued only on
29 March 2013.
FII investment in “to be listed” debt securities
According to existing Foreign Exchange Management (Transfer or
issue of Security by a Person Resident outside India) Regulations,
2000, FIIs registered with India’s capital markets regulator, SEBI,
are allowed to invest only in listed nonconvertible debentures
(NCDs) bonds issued by an Indian company. SEBI has allowed
FIIs to invest in “to be listed” debt securities. Accordingly, the
Reserve Bank of India (RBI) has decided that SEBI-registered FIIs/
sub-accounts of FIIs can now invest in primary issues of NCDs/bonds
only if listing of such bonds/NCDs is committed to be done within
15 days of such investment. If not done within 15 days then the FII/
sub-account of FII shall immediately dispose of these bonds/NCDs
either by way of sale to a third party or to the issuer and the terms
of offer to FIIs/sub-accounts should contain a clause that the issuer

in the broader global context this growth prole is still
very attractive when compared with negative growth
fears in Europe, US and Japan. India therefore remains
an attractive destination for global investors, especially
those in the Western hemisphere.
For a PE investor, the main challenges with India have
been: (i) the uncertain regulatory environment and
(ii) lackluster exit performance. With the Government
recognizing the PE industry’s importance to India,
hopefully the rst of these concerns is being resolved.
In fact, the Government has taken a few positive steps in
the last few weeks. Exits remain a greater issue for the
Indian PE industry. There have been more than 2,000 PE
investments in the last six years in India, and a signicant
portion of that (more than two-thirds) is now due for exit
or further investment. High original entry valuations have
constrained follow-on investments in and exits of these
companies. The lack of exits has also hindered fund-raising
plans of a number of India-focused funds. A churn is
expected with fund managers, some of has already
been seen.
Though PE rms are busy screening and evaluating both
investment and exit opportunities, completing deals has
been difcult because of such reasons as regulatory
issues, rupee volatility and shallow IPO markets. We
expect this phase to continue over the foreseeable future
as the industry consolidates. However, from a long-term
perspective, we remain bullish on India PE and expect
the industry to come out much stronger from the current
situation.

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